Endowment Matters

Price Increases versus Inflation: The Reality

This weekend's issue of the Financial Times includes a column entitled "The Week in Numbers" at the end of the first section.

A key figure cited: 16%. The index of meat prices of the UN Food and Agriculture Organization is up 16% over the past year. What is more striking, for those who eat lamb somewhat regularly, is that lamb prices have reached a 37-year high.

Yet we are told that inflation is almost non-existent. My understanding of economics is that inflation is an increase in the money supply; that we have, to be sure. The meat figures cited above represent price increases, which are sometime referred to as inflation (I myself use that term loosely, sometimes).

So, we find ourselves in an environment in which, we're told, core inflation is near 0%, yet here we see that the meat index is up 16% in the past year. I have highlighted this issue before: the CPI number, we must remember, excludes food and energy prices.

There are two lessons here:

(1) commodities can be a valuable piece of the puzzle when it comes to an overall endowment strategy

(2) when independent schools set tuition rates based on CPI, boards of trustees might do well to take a broader look at the increase in prices of goods that are not included in the CPI number. If your school is raising tuition at CPI+2, you may be creating a deeper imbalance in families' pocketbooks by overlooking the fact that they're probably paying more for basic needs (food, for example) than ever before.

Question: how might this scenario affect your endowment strategy? Are you still willing to leave endowment growth on the back-burner?

Planning for an Endowment Crisis

Niall Ferguson had a great article in today's Financial Times, addressing the sovereign debt crisis in Greece, which is affecting the European Union. He submits that it's only a matter of time until a similar crisis erupts in the US.

School leaders would do well to consider the potential implications, were such a crisis to occur in the US. The question is this: how can schools best hedge against this kind of crisis in terms of endowment management? If you haven't engaged your asset manager in a discussion of this sort, I would suggest that you do so sooner rather than later, as it may take time for him/her to 1) propose a new asset allocation and 2) execute the reallocation over a fixed period of time. As one example, George Washington University decided last year to reallocate their portfolio to allow 30% of funds to be invested in natural resources and commodities.

How active is your management?